The stock market is rising. Unemployment is down. And as President Trump keeps telling us, GDP growth is fairly robust. So why aren’t wages rising? Why is middle class prosperity eroding? Why do so many feel that the American Dream has left them behind?
The answer can be found in little-known but very dangerous phenomenon that The New York Times last month called “a startup slump — a decline in the creation of new businesses.”
Since 1980, the number of new startups formed each year has plummeted by half — from almost 15% of all business 35 years ago to barely 8% today. And over the last decade, this startup slump has become especially severe in the high-tech sectors that were once its most fertile wellsprings.
Why should we care if the number of new startups is falling? Because startups are the engine of job creation and economic progress in America, the motive force of our prosperity.
This fact is not widely known amongst the public, who assume that the biggest drivers of job and income growth are, well, the biggest businesses. But the facts say otherwise.
In his seminal 1958 work The Sources of Invention, the late British economist Jonathan Jewkes reviewed the histories of all the major job-creating inventions of the twentieth century. He found, to the surprise of many, that they all were the work of entrepreneurs and startups. And had Jewkes looked at the 19th century, he would have found the same thing: the new industries that powered American prosperity over the last 150 years were all created by startups.
The sewing machine, electric power, automobiles, acrylics, the zipper, the aircraft industry, the jet engine, the radio industry, the television industry, power steering, the helicopter, rocketry, cellophane, neoprene, air conditioning, the electron microscope, instant cameras, magnetic recording, fluorescent lighting, radar, the safety razor, stainless steel, and the world’s first cyclotron — these are just a few of the breakthroughs that came from entrepreneurs and startups. And those were just the industries created up to the 1950s when Jewkes wrote his book.
To all the above, we must also add the trillion-dollar, world-changing industries of the last 60 years: the semiconductor, consumer electronics, personal computer, software, biotech, mobile telephony, and Internet e-commerce industries. Once again, all were created by small startups — and on the basis of a patented innovation, no less (more on that in a moment).
Startups don’t only create breakthrough innovations and new industries. They also create jobs. Not just many of them, or even most of them. I mean, all of them!
“Across the decades, young companies are really the heavy hitters of job creation,” Arnobio Morelix, an economist at the Kauffman Foundation, told The Times.
In fact, startups have been responsible for literally 100% of all net job growth in the United States over the last 40 years. If you took startups out of the picture and looked only at big businesses, job growth in the U.S. since 1977 would actually be negative.
Now, it’s reasonable to ask yourself, what’s so unusual about startups? Why do they always create the great leaps forward for mankind? The answer lies in basic social psychology.
With respect to entrepreneurs, Jewkes observed, “there is no kind of organized coordination which approaches in effectiveness the synthesizing which goes on in one human mind. [Entrepreneurs’] great gifts arise from the habit of calling everything, even the simplest assumptions, into question.”
“I am a horse for a single harness,” Einstein said once, “and not cut out for team work.”
In contrast, noted Jewkes, “The limitations of teamwork are obvious. Teamwork is always a second best. A large team is essentially a committee and therefore suffers from the habit, common to all committees but especially harmful where research is concerned, of brushing aside hunches and intuitions in favor of ideas that can be more systematically articulated.”
Added the economist William J. Baumol in his 2002 book The Free-Market Innovation Machine: “[Corporate R&D] is not the realm of the unexpected, of the unrestricted exercise of imagination and boldness that is the essence of entrepreneurship. It is, rather, the domain of memorandums, rigid cost controls, and standardized procedures, which are the hallmark of trained management.” In short, innovation at large firms is a “bureaucratized activity.”
Or, as Sir Alexander Fleming, the discoverer of penicillin, once put it, “[Corporate R&D] is a very good way of employing a certain number of people, paying salaries, and not getting very much in return.”
So which are more crucial economically — startups or big firms? The 19th century British economist John Stuart Mill once said that to trust our prosperity to big firms is like “supplying our deficiency of giants by the united efforts of a constantly increasing multitude of dwarfs.”
In every way we know how to measure, startups and small businesses are the fulcrum of America’s prosperity engine. According to the U.S. Small Business Administration (SBA), they are thirteen times more innovative per worker than large firms, and they create more patents per employee, more patents in cutting-edge scientific and technical fields, and more patents that are technologically revolutionary than those of large firms.
So here’s the real question: What’s causing this startup slump? The Times noted that big business uses its market power to stifle startups. But startups have always been challenged by large incumbent firms, so that just begs the question. Why are startups so vulnerable to big business market power today? What’s different now?
What’s different now is that the big technology giants like Apple, Cisco, Google, et. al. have carried out a coordinated lobbying campaign over the last decade that resulted in legislative actions, regulatory decisions, and Supreme Court rulings that have crippled the patent rights of smaller and more innovative companies, especially startups.
You can read the details on Big Tech’s ugly anti-patent campaign in my recent article in The Hill newspaper, the leading journal of politics in the nation’s capital. Suffice it to say that having used patent protection themselves when they were startups to climb up the ladder of success, the Big Tech multinationals now want to pull up the patent ladder behind them so others cannot use it. Not only that, they’re actually trying to smash the ladder of patent protection itself and use the pieces to club the next generation of startups into bankruptcy.
It’s one thing for incumbents to try to defeat upstart competitors — that’s the nature of capitalist competition, right? But capitalist competition implies a process through which the best competitor, using the tools of competition equally available to all, wins and in the process benefits the consumer.
However, as a result of Big Tech’s anti-patent campaign, the most important tool in any innovative young company’s arsenal — its ability to protect and claim ownership of its own ideas — has been stripped from American startups. It’s downright unpatriotic, not to mention just plain wrong, to “compete” by ripping the gears off of the patent engine that drives the prosperity of all Americans — all in a self-centered cash-grab that eviscerates the economy we will hand to our children and grandchildren.
What’s behind the slump in job and wage growth, and the erosion of the American Dream? It’s Big Tech’s selfish and un-American assault on startup patent rights.
David Pridham is CEO of the patent advisory Dominion Harbor Group.